Enterprise value is a measure of a company’s total value. It is calculated using the following formula: Market Capitalisation + All Debt – Cash (or cash equivalents).
The enterprise value is different from the true value of the underlying business. Instead, it represents a fair value that investors should be willing to pay in order to buy the firm.
In order to compare the enterprise value of a company with its share price, you simply need to divide the enterprise value by the number of shares outstanding. This would be the enterprise value per share.
The flaw of enterprise value is that it is not known how companies are using debt. Some firms are very capital intensive and may be using a lot of short-term debt capital to benefit their short-term operations.
Copyright © 2021 Methodology